The Markets June 6, 2013

Maybe DC Plans Should Be More Like DB Plans

Reducing volatility and expanding investment options for defined contribution (DC) plans could improve risk-adjusted returns, according to BNY Mellon.
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In a white paper, investment management firm BNY Mellon examined the broadening of investment options available to DC retirement plans to include real assets, emerging market equities and debt, and liquid alternatives and how that could improve risk-adjusted returns while reducing volatility and providing better protection against inflation.

“Traditional DC plans do not provide the level of diversification and risk balance that plan participants require to achieve their retirement goals,” said Robert G. Capone, executive vice president, BNY Mellon Retirement Group, and author of the paper, “Retirement Reset: Using Non-Traditional Investment Solutions in DC Plans.”

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Capone attributed the limited range of investment options in DC plans as the primary reason for their inability to match the performance of defined benefit (DB) plans, which tend to incorporate a range of non-traditional assets. Capone noted that non-traditional approaches could enhance the success of investors in the current environment, which he expects to be characterized by higher volatility, heightened inflation risk and returns that are expected to be lower in the long term.

If DC plans were constructed more similarly to DB plans, approximately 20% of plan assets would be allocated to non-traditional strategies, such as real assets, total emerging markets (which combine equities and fixed income) and liquid alternatives, BNY Mellon said.

“Equities comprise a higher percentage of the DC portfolios than they do of DB portfolios,” Capone said. “We believe that applying the best DB practices to DC plans would reduce equity risk and home country bias as well as thoughtfully incorporating alternative investments to increase diversification, return potential and downside risk management.”

The real asset portion of the DC portfolio proposed by BNY Mellon is designed to hedge against inflation and would include Treasury Inflation-Protected Securities (TIPS), real estate investment trusts (REITS), commodities and natural resource equities.

The combination of emerging markets equity and fixed income would provide a more blended and balanced approach than allocating only to emerging markets equities, according to Capone. The more balanced approach has the potential to reduce portfolio volatility and diversify country and currency risks than could be accomplished with emerging markets equities alone.

BNY Mellon sees liquid alternatives as a way to provide DC participants with strategies that have a low correlation to equities markets. “There is a wide range of liquid alternative strategies,” said Capone. “So, we are using three hedge fund indices as proxies for this asset class.”

In Practice June 6, 2013

They Save But They Don’t Plan

Chinese Americans are great at saving, according to research from Wells Fargo, but fewer than half of survey respondents have a written financial plan.
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On average, Chinese Americans reported twice the national savings among nonretired adults and significantly higher savings rates than the national average, according to a survey from Wells Fargo.

Saving is more of a priority for Chinese Americans, with 43% cutting back on spending to save for retirement (versus 36% of the general population). Non-retired Chinese Americans have median self-reported retirement savings of $100,000, compared with $45,000 for non-retired Americans. Only one in four Chinese Americans (24%) agree that current expenses prevent them from saving for the future (versus 39% of general population). And nearly two-thirds (63%) are confident that they will be able to continue their lifestyle in retirement, compared with fewer than half (48%) the general population.

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Many Chinese Americans already have a solid foundation to meet their long-term financial goals, said Margaret Liu, a senior vice president, and senior trust and fiduciary specialist of Wells Fargo Private Bank, but not all of them have maximized their investment potential. “I found the study very interesting, based on my own household and upbringing,” Liu told PLANADVISER. “Savings is just there,” she said, an important part of the culture. “But there is not a lot of discussion about planning. Saving is one critical component, but there are others.”

Despite making retirement savings a priority, only two in five (43%) have a written retirement plan, the study found. “There is gap in planning and investment potential,” Liu said. The next step for this population is to help them get pen to paper, so they can have a roadmap, which includes a need for sound investment advice.

Advisers who are considering tapping this market can emphasize the importance of sitting down to think about goals. As Liu pointed out, planning takes more than mere savings. “It’s not just squirreling money away, but thinking about what you need now, what are you trying to save for, whether you’re optimizing in terms of legacy, and thinking about strategy.”

Let Numbers Tell the Story

Chinese Americans could learn to optimize their investment potential, she suggested, and advisers can provide education around what investors are trying to achieve. “Show the numbers,” Liu said. Show the numbers in black and white, and how these numbers project out based on what investors have.

Numbers give the adviser a quantifiable measure, Liu said. She suggested projections based on current assets to show investors where they could be in 10, 15 or 20 years: “Know the goals, and show the difference in numbers.” Show the importance of having a written financial plan and investing appropriately to meet goals. “Savings is not investment,” Liu said flatly.

“This group does a lot of online research and likes to get information there,” Liu said. “So maybe a place to start would be Wells Fargo’s online resource, ‘My Financial Guide,’ which offers articles, videos and tools to gain more knowledge.”

“Advisers need to get into the community and get involved,” Grace Niwa, the Asian public relations consultant for Wells Fargo, told PLANADVISER. “Let them feel like they know you, and support the community efforts they are passionate about to build that relationship.”

Other survey findings:

  • About two-thirds of Chinese-Americans report feeling financially comfortable (67%) and are confident about their financial future (65%), compared with only about half of all U.S. adults;
  • Three in five (60%) Chinese Americans feel they are better off financially compared to three years ago (versus 51% of U.S. households);
  • Chinese Americans reported significantly higher household incomes, with about a third (37%) earning over $100,000 annually (versus 23% of all U.S. adults);
  • Only 17% of Chinese Americans said they spend more than they can afford (versus 25% of the general population); and
  • Most (65%) report paying off credit card balances every month, compared with just 42% of all Americans.

The survey was conducted online between November 9 and December 3, 2012 among adults nationwide and Chinese Americans. Qualified respondents were nonstudents, age 25 to 75, who are the primary or joint financial decision-maker in the household with household investable assets of at least $10,000. Survey results are weighted to reflect U.S. Census data for gender, age, race/ethnicity, region and household income.

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